Sterling nosedives to a 31-year low over fears of a "hard" exit by Britain from the EU and remains vulnerable despite recouping some of the losses

Sterling recouped some losses after plunging almost 10 percent on Friday amid growing fears of a “hard” exit by Britain from the European Union that sent a shiver through world stocks markets ahead of US jobs data.

The pound nosedived from US$1.2600 to US$1.1378 in a matter of seconds at one point in Asia after crashing through key support levels, triggering a wave of selling. The lowest of the trades was later canceled.

But it quickly bounced back and it was around 1.2455 by 0900 GMT, still down about 1.3 percent from late US levels and leaving traders feeling bruised and a little confused in the absence of any major news overnight.

“This was even a bigger move than what we saw after the Brexit vote. There were almost no offers, no bids when this happened,” said a trader at a European bank in Tokyo.

The plunge in the pound, which looks like being roughly 4 percent for the week overall, lifted London’s FTSE as many of its firms are looking at bumper returns when their overseas earning are exchanged back into sterling.

The pound has come under renewed pressure as fears grow that Britain’s divorce from the EU will be messier and costlier for the economy than expected. UK Prime Minister Theresa May on Sunday set a March deadline for the formal departure process from the EU to begin.

Fat finger error

“The whole thing’s been on a precipice since Sunday, but the selling has been very substantial so you can only think its been part of that general punishment of the pound for Brexit,” said Sean Callow, senior currency strategist at Westpac.

“I think we’ve underestimated how many people had money positions for a very wishy-washy Brexit or even none. May’s comments have really just started the clean out and we just haven’t seen any sign of bouncing.”

While sterling’s move broadly coincided with some news reports that Britain’s separation from the eurozone may be a tough process, some traders blamed it on a possible a “fat finger” error triggering automatic stop-loss orders.

“A few stops got triggered in early trading and once cable broke 1.20, option barriers sent it lower,” said Gerrard Katz, head of Asian FX sales and trading at Scotiabank said. “The broader market impact has been limited and cable should consolidate between the 1.20 and 1.25 levels.”

Sterling plunged to a 31-year low on Friday as anxiety over a “hard” exit by Britain from the European Union triggered a wave of selling, leaving the currency vulnerable to further falls even as it recouped some of the steep losses.

Earlier, the pound suddenly dived about 10 percent from around US$1.2600 to US$1.1378 on some trading platforms. The move occurred in a matter of seconds, in thin early Asian trade.

Sterling quickly bounced back to levels around US$1.2500, and after some choppy moves, it was last fetching US$1.2432, still down 1.5 percent on the day.

Sterling has been “on a precipice since Sunday, since Theresa May and the March Brexit negotiations,” said Sean Callow, senior currency strategist at Westpac.

“I think we’ve underestimated how many people had money positions for a very wishy-washy Brexit, or even none.”

French President Francois Hollande said on Thursday the European Union needed to remain firm with Britain after it appeared Prime Minister Theresa May had opted for a tougher exit from Europe.

Global markets have been on edge in recent days on worries about a “hard” exit by Britain from the EU and about May’s comments on the impact of loose monetary policy, which some saw as a thinly veiled attack on the Bank of England.

That left the pound in a precarious position and exposed to speculative attacks.

Crazy few minutes

“It seems like algorithm trading was behind all this in thin liquidity conditions,” said a trader for a North American bank, referring to Friday’s sudden plunge in the sterling.

“There were no reasons for sterling to make such big moves … It was a crazy few minutes.”

A trader for a Japanese bank said the sell-off was probably partly caused by the breach of option barriers, and triggering of stop-loss orders in thin market conditions.

Sterling has been wallowing at its lowest levels since the mid-1980s this week, on track for a weekly loss of 4.2 percent, as investors feared the impact of Brexit.

Given the uncertainty around the political and economic fallout of Brexit, sterling is likely to head lower again, analysts said.

“It does look like it could be a hard Brexit. There’s implications there for the City, for manufacturing etc., the way to mollify that, to offset it would be to have a much lower pound,” said Jeffrey Halley, senior market analyst for FX broker OANDA in Singapore.